Charles and Marcia are married cash-basis taxpayers. In
2012, they had interest income as follows:
• $500 interest on federal income tax refund.
• $600 interest on state income tax refund.
• $800 interest on federal government obligations.
• $1,000 interest on state government obligations.
What amount of interest income is taxable on Charles and
Marcia’s 2012 joint income tax return?

$ 500$1,100$1,900$2,900

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(c) The requirement is to determine the amount of
interest income taxable on Charles and Marcia’s joint income tax
return. A taxpayer’s income includes interest on state and federal
income tax refunds and interest on federal obligations, but excludes
interest on state obligations. Here, their joint taxable
income must include the $500 interest on federal income tax
refund, $600 interest on state income tax refund, and $800 interest
on federal government obligations, but will exclude the
$1,000 tax-exempt interest on state government obligations.
Although a refund of federal income tax would be excluded from
gross income, any interest on a refund must be included in gross
income.